Tuesday, July 19, 2016

The world feels riskier, but not to markets

The overriding theme in "what keeps me up at night" this week surrounds geopolitical risk and the risk of uncertainty. The world is a riskier place both because of actual events and well known events that like clarity on resolution. This risk exists without even touching on the US election, yet markets continue to be in "risk-on" mode. I am not sure what it will take to switch thinking.

Granted specific markets have been affected by these risks and uncertainty. We can point to the decline of sterling and small cap UK stocks after BREXIT or the fall in Turkish lira after the coup attempt, but there has been less overall anxiety which seems surprising. My concern is the overall question of whether investors should hold risk assets. 

All you have to ask are a simple set of questions:
  • Is a capital investment for five years safe under the current environment?
  • Will earnings grow and be unaffected by these uncertainties? 
  • Will productivity of labor increase under the current environment?

If the answer is no to these questions, you have to wonder why the US equity markets are at highs. 

On a more micro level, the impact of low rates on the rule of 72 is shocking. This has been going on for years, but it still is something that is extraordinary. It is impossible to double your money when rates are negative.

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